The New Arms Race: Rare Earth Minerals
Weekly Investment Update | By Brian Schreiner
Last week marked the unofficial start of the third-quarter earnings season, with 36 companies reporting. The banks dominated the news. While there are some isolated signs of credit deterioration on the commercial side, most analysts believe it’s not widespread and not enough to signal that a recession is imminent. Moody’s said the banking system and private credit markets are sound despite worries over bad loans.
However, there are several areas of the economy investors should be concerned about. Today, I want to focus on two areas: the U.S. consumer and the escalation of U.S.-China trade relations.
Consumers are Tapped Out
While the stock market is hitting all-time highs, economic growth has been almost entirely driven by AI. If you subtract the roughly $400 billion in AI infrastructure spending from the GDP, the rest of the U.S. economy is barely growing.
According to Lakshmi Ganopathy of Unicus Research, “Consumers are broke,” facing "hidden inflation" from soaring costs in auto insurance, property taxes, and health insurance. Furthermore, student loan defaults are reappearing on credit files, causing consumer credit scores to drop by as much as 200-250 points.
This stress is causing a crisis in the auto sector. Stimulus checks made many subprime consumers appear prime, allowing them to take on expensive auto loans. Today, one in five new car borrowers pays over $1,000 a month, with some locked into 84-month loans at 22-23% interest.
Ganopathy said that 69% of Americans live paycheck-to-paycheck, and, alarmingly, 25% of that group are now using Buy Now Pay Later (BNPL) services to pay for groceries. As credit card 90-day delinquencies double from 2021 levels, lenders are tightening. Credit card companies are cutting credit lines, and BNPL lenders, using real-time AI to monitor consumer financial health, are beginning to decline transactions.
The China Trade Fight
The market’s week was marked by volatility, driven almost entirely by the ongoing trade tensions with China. On Friday, October 10, the stock market sold-off after President Trump threatened 100% tariffs in response to China's moves on rare earth metals. By last Monday, the President posted, "Don't worry about China," and the market regained most of its losses.
But the trade story is far from over and, contrary to what you might read in the headlines, China has the upper hand – at least for now.
The U.S. has tightened its export controls, closing a loophole that allowed sanctioned Chinese companies to use their subsidiaries to get around the rules. While the U.S. saw this as a simple fix, China viewed it as a betrayal of a recent truce.
In response, Beijing "dropped the hammer" with a game-changing move. It announced new export license requirements for rare earth metals, which are materials critical for everything from electric vehicles and wind turbines to advanced defense systems. Because China controls over 90% of the world's processing for these materials, it now has the power to disrupt nearly every major global industry. Crucially, the new rules could even block a U.S. company from selling a product made with Chinese-processed materials.
President Trump immediately retaliated by threatening 100% new tariffs, a move that sent global stock markets plummeting. According to commodities analyst Doomberg, this is a "threat of economic nuclear war" and that China holds the clear upper hand. This rift may signal a new phase in the U.S.-China relationship, potentially marking the end of the 50-year global economic order.
This new power was illustrated with a key example: a high-tech Dutch company that makes essential chip-making machines. The U.S. has forbidden this company from selling to China. However, because those machines use Chinese-made rare earth magnets, China could now theoretically block the company from selling its machines to the U.S.
Don’t underestimate China's confidence. Beijing believes its own tech industry can survive U.S. sanctions, that it has built financial systems with partners like Russia to bypass the U.S. dollar, and that the U.S. military, already strained by the war in Ukraine, can now be "starved" of critical parts. In an interview over the weekend, analyst Luke Gromen explained that, in the short term, the U.S. will likely have to back down, damaging its global prestige.
In the long term, the Chinese “sanctions” on the world may backfire by triggering a historic outburst of spending as the U.S. and its allies pour billions into developing their own rare earth mines and processing plants. If so, this reshoring of rare earths could destroy the leverage China has now and create an economic bifurcation into two distinct systems – one led by the U.S. and another led by the Chinese.
How the U.S. pays for these massive spending projects is the key question now. Increased deficit spending will cause reactions in the bond and commodity markets creating new opportunities and risks for investors. α
Interesting things I came across this week…
The “sweeping betrayal of trust” that spooked Wall Street (CNBC)
The AI Bubble is Giving Enron Vibes (Dave Karpf)
Why EVs Depreciate Faster Than Gas Cars (CNBC)
Sunday’s “Theft of the Decade” at the Louvre (France 24)
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